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  <h1>Possible variations on a contract</h1>

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  It depends on the purpose of making the varations.
  <br>
  You should be able to expend the concept to different products.

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    To mitigate risk
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      Nature: set up limitations on the policyholders who can take out the policy and the condition or amount of paying out the claim / surrender value.
      <ul>
        <li> Exclusion clause
        </li>
        <li> Initial underwriting
        </li>
        <li> Set up excess, maximum payout
        </li>
        <li> age limitation
        </li>
        <li> waiting period
        </li>
        <li> Apply age-related management charge to reduce mortality risk.
        </li>
        <li>Reduce initial allocation percentage
        </li>
        <li>Set minimum single premium to avoid large volume of small policies, thereby reducing risk of not meeting fixed and/or per-policy expenses.
        </li>
        <li>Increase surrender penalty applied to deter withdrawals
        </li>
      </ul>
      However, each of these may make the product less marketable.
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    To increase marketability for car insurance
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      <ul>
        <li> Coverage overseas
        </li>
        <li> Replacement vehicle
        </li>
        <li> Multiple drivers
        </li>
        <li> Non-claim discount
        </li>
        <li> Road side assistance
        </li>
        <li>Pay as you drive
        </li>
        <li>Gap insurance (GAP insurance is the difference between the actual cash value of a vehicle and the balance still owed on the financing (car loan, lease, etc.))
        </li>
      </ul>
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    To reduce premium rate / cost of benefit
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      <ul>
        <li>
          Weaken assumptions used in pricing basis
          <ul>
            <li>
              Particularly with regard to claim inception and termination rates.
            </li>
            <li>
              But, increased risk of pricing assumptions not being borne out in practice, which will result in future losses.
            </li>
          </ul>
        </li>
        <li>
          Reduce profitability
          <ul>
            <li>
              Expectation of increased volumes offsetting reduced profit per case.
            </li>
            <li>
              But, elasticity of demand may not be accurately understood and, thus, increases in volume may not be as expected.
            </li>
            <li>
              Also, need to consider competitor response to lowering premiums, which may limit any expected increase in competitiveness.
            </li>
          </ul>
        </li>
        <li>
          Reduce underwriting costs
          <br>
          Saving can be passed on to policyholders in the form of lower premiums. But, claims experience is likely to worsen, which will negate any reduction in premiums.
        </li>
        <li>
          Implement more stringent underwriting procedures
          <ul>
            <li>
              Should lead to lower claims inception rate and, thus, lower premiums.
            </li>
            <li>
              But, will increase decline rates and lengthen sales processes.
            </li>
            <li>
              Also, increased cost of underwriting may outweigh any premium reduction as a result of better risk
              targeting.
            </li>
          </ul>
        </li>
        <li>
          Reduce claims outgo
          <ul>
            <li>
              Apply limit on proportion of income protected, maximum age or maximum payment period.
            </li>
            <li>
              Increase exclusions applied and/or introduce longer deferred period.
            </li>
            <li>
              Reduce escalation of claims in payment
            </li>
            <li>
              These actions may reduce the marketability of the product, so that the reduction in premium rates achieved does not result in increased volumes of business sold.
            </li>
          </ul>
        </li>
        <li>
          Implement more stringent claims control processes
          <ul>
            <li>
              Decline more claims.
            </li>
            <li>
              Review existing claims on a more regular basis.
            </li>
            <li>
              Offer long‐term claimants a lump sum final payment in lieu of a regular future income.
            </li>
            <li>
              Reputational risk and PRE considerations if claims philosophy not in line with policyholders
              expectations. Also, increased costs of new claims control measures will limit any reduction in
              premium rates.
            </li>
          </ul>
        </li>
        <li>
          Reduce anti‐selection effect
          <ul>
            <li>
              Target only lower risk business (e.g. with regard to age, sex, occupation) to allow for lower risk margins.
            </li>
            <li>
              Sell product as rider benefit only (e.g. when purchasing a mortgage).
            </li>
            <li>
              Better training of sales teams to identify anti‐selection.
            </li>
            <li>
              Effect regular policy reviews to identify over‐insurance.
            </li>
            <li>
              But, may lead to significant reduction in business volumes and any additional costs incurred will reduce possible premiums reductions.
            </li>
          </ul>
        </li>
        <li>
          Pay less commission on sale
          <ul>
            <li>
              Lower incentive to sale may reduce overall business volumes.
            </li>
            <li>
              Increase proportion of commission successfully clawed back in event of withdrawal.
            </li>
            <li>
              May also reduce incentive to sale and any increased administration costs associated with this may outweigh the benefits.
            </li>
          </ul>
        </li>
        <li>
          Reduce on‐going expense loadings
          <ul>
            <li>
              Streamline processes to increase efficiency.
            </li>
            <li>
              But, may result in poor customer service and reputational risk.
            </li>
            <li>
              Cross‐subsidise from policies with higher premium rates to those with lower premium rates and/or between different distribution channels etc to increase competitiveness.
            </li>
            <li>
              But, creates risk that mix of business sold is different to that assumed, leading to future losses.
            </li>
          </ul>
        </li>
        <li>
          Invest funds held in assets with a higher expected return
          <ul>
            <li>
              Can reduce cost of future claims outgo.
            </li>
            <li>
              But, introduces greater uncertainty and mismatching risk. Also, need to consider whether any regulatory risk associated with such a mismatch.
            </li>
          </ul>
        </li>
        <li>
          Reinsurance
          <ul>
            <li>
              Make more effective use of reinsurance arrangements.
            </li>
            <li>
              Typically, this will mean retain more risk (assuming that reinsurance premiums include profit loading for reinsurer).
            </li>
            <li>
              But, increased claims volatility will result from higher retained risk.
            </li>
          </ul>
        </li>
        <li>
          Guarantees
          <ul>
            <li>
              Remove/reduce the level of any guarantees in the policy.
            </li>
            <li>
              Introduce or extend use of reviewable/renewable premiums.
            </li>
            <li>
              But, such steps are also likely to reduce marketability.
            </li>
          </ul>
        </li>
      </ul>
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  <p> Author: Mengke, Lyu</p>

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